Pivotal bond auctions ahead…

Yesterday’s resurgent demand for high yield currencies appears to have faded a little as traders turn cautious ahead of the debt auctions in Germany and Portugal today. At home data has been positive with a rise in mortgage approvals for November and an unexpected improvement in construction activity for December. The direction of the currency markets in the next few trading sessions will be largely driven by the outcome of debt auctions in key Eurozone countries.

Pound Sterling – UK Markets

The Pound has gained against the Euro and stabilised against the US Dollar this morning. In data just released, mortgage approvals in the UK rose for November while the construction PMI surprisingly climbed to a reading of 53.2 for December, compared to November’s reading of 52.3. Latest net consumer credit figures were also better-than-expected, auguring well for the Pound today. Yesterday’s British manufacturing statistics were consistent with a general improvement in manufacturing across various geographies and provided a decent upside to Sterling against the US Dollar. The direction of the Pound against the Euro will be influenced by the crucial German and Portuguese bond sales later today.

US Dollar – US Markets

Risk appetite has eased off today and led the US Dollar to stablise against the Pound and the Euro. The minutes of the latest FOMC meeting have indicated that Fed officials will start announcing their forecasts for the central bank’s key interest rate. The key economic release on tap today is the factory orders data for November, which is expected to show a substantial improvement and confirm market perceptions that the US economy is improving. We expect the US Dollar to take direction against Sterling and the Euro from the outcome of the bond auctions scheduled for later today.

Euro – European Markets

The Euro is trading marginally lower against the majors ahead of the outcome of the German and Portuguese bond auctions, worth €5 billion and €1 billion respectively. The next few weeks will see a surfeit of important bond auctions with French bond sales scheduled tomorrow and Italian and Spanish auctions slated for next week. In a major development yesterday, the European Financial Stability Facility indicated that it plans to raise €3 billion from a sale of three-year bonds to help finance the bailouts of Ireland and Portugal. The economic release taking center stage today is Eurozone consumer price inflation which is expected to ease in December to 2.8%, still well above the ECB’s 2% target. Earlier today the final estimates of the PMI services indices across the Eurozone for December, depicted a mixed picture with improvement in France and the Eurozone, but deterioration in Germany. Meanwhile, surging unemployment and concerns over the European debt scenario, led French consumer spending to decline in November.

Other Currencies – Highlights

The Kiwi Dollar is trading lower against the US Dollar as investors reduce their bets on high yield currencies ahead of the outcome of impending European bond auctions. Additionally, market speculation that a slowdown in Europe may weigh on growth prospects for the global economy, has further reduced demand for the Kiwi Dollar. However, the quarterly Grant Thornton International Business Report suggests that businesses in New Zealand are more upbeat about prospects for 2012.